Gas Production Increases

North American Production Even

With the supply of Natgas in the US increasing for the week, the bears are yelping. But in Canada, the supply decreased by more than the increase in the US. The net result for the integrated market was near zero. The low prices of natgas are having a dramatic impact on production----in Canada. But the US and Canadian markets are one market. WIth the large pipelines from Canada, the production in Canada can be sold in New York City. But Canadian production is both important (large) and decreasing. The real story is the shift of production from Canada to the US Shale plays.

If price continues at the current level, the production of conventional natgas in Canada will continue to fall. Right now the impact of the fall is being moderated by the large storage overhang in both the US and Canada. When the Canadian storage overhang is eaten through, the full impact of the lower production will be felt. The bears may face a severe shock at the magnitude of the problem.

Robry's Supply Numbers BACK!

They show that production has clearly bounced off a low. The question is will the production start falling after the new year?
Why? Because there is always a STRONG seasonal bounce of production in Nov/Dec and with the shut-ins it would be very strong this year. In other words, the low of production was overstated since some of the decrease of production was voluntary. Likewise the current rebound in production, while real, is also overstated because of the shut-ins (Usually you get a higher rate of production for a short period of time after a well is shut-in).

The results for early Jan should be a good measure to see if production has really started to climb or if this rise is temporary.

Bank Lending and the Economy

Without a doubt bank lending has a huge impact on the overall economy. When bank lending becomes difficult, then any expansion of economic activity is difficult and slow. When you have a contraction of lending, no economy can grow. This is the reason for TARP and several government programs. The goal was to increase lending of banks. Recently we have seen the Obama Administration allow banks to repay TARP under terms that will hurt the overall economy. For example, BOA has been allowed to use bank capital to repay the TARP and this decreases the amount of capital they have for lending. The other large banks are following suit as soon as they can. When the banks are allowed to use bank capital to repay TARP there should be a DECREASE in overall lending. Sure enough the following chart shows the decrease starting just as some of the banks starting paying back TARP.


Let's look closer at the chart:

Notice we are now below 2008 in total commercial lending at large banks. As the TARP continues to be repaid, expect lending to continue to fall. If you look at the economic history of any country, when bank lending falls like this a recession will follow.
So far TARP has kept the banks lending and kept a total wipeout of the economy. But with bank lending now falling like a rock, it is hard to see how the economy can grow in 2010.

What's more the bank lending to consumers has also started a trend down. Note that the first banks to repay TARP were large commercial lenders (few consumers bank with Goldman or Morgan Stanley). But they do bank with BOA and Citibank. As these banks pay back TARP with bank capital, their consumer lending will also fall. Notice in the following chart the fall in consumer lending in the past month or so:


So as several consumer banks repay TARP, the expectation would be for the decline in consumer lending to continue. With consumers borrowing less, the economy is going to have a hard time rebounding. Thus, forecasts of an 2010 recovery may be too optimistic. While a double dip is hard to predict, with the repaying of TARP by consumer banks, it becomes more of a risk.

Robry's Supply Numbers still under review.

When he posts his revised numbers, I will resume the graphs.

Central Bank's Demand for Gold

Demand from Central Banks for Gold
I want to look at JUST the members of the IMF (that means several countries that recently bought gold are not counted) and see how much gold they need to buy to get their gold percentage of foreign currency reserves to a reasonable level. So any central bank that had reserves above the level is assumed to do nothing.
For 5% gold reserves they would have to buy 133.83 million ounces.
For 7.5% gold reserves they would have to buy 253.62 million ounces
For 10% gold reserves they would have to buy 372.32 million ounces
For 15% gold reserves they would have to buy 620.25 million ounces.

This shows the central banks for even low levels of gold as a percentage of foreign reserves have to buy HUGE amounts of gold. And this is just the 65 countries of the IMF (+China). WOW.
Put another way, if everyone wanted just 7.5% gold, they would have to buy the equivalent of all the gold reserves of the US.

There is an additional factor. These results mean almost all the reserves of the Central Banks are made up of other currency holdings (mostly dollars). As these currencies loose value, the reserves of the Central Banks are going to loose value. At what point are the Central Banks going to HAVE to take action to protect their reserves?

Lastly, I just noticed that an article shows that the world produces 80 million ounces a year. If the Central Banks all decided to buy to get to at least 5% gold reserves, they would buy almost 2 years of current production. That assumes near ZERO private purchases of gold. If they want to get to 7.5% of reserves as gold, they would buy the next 3 and a half years of production.

Note: I got the foreign reserves and gold holdings from the IMF website. Then in a spread sheet calculated the required purchases of gold. I assumed no Central Bank sold any gold. If the US, Germany and others sold enough gold to get to 15% then the numbers would about balance. But the US would give China roughly 206 million ounces of our 261 million ounces of gold.

Production Leveling Stabilizing

NatGas production falls back to prior levels!

In one of the most unusual events since Robry started published his results many years ago, natgas production jumped by 5 bcf for a week and then in one day fell back 5 bcf. This VERY unusual event has brought lots of comments. Robry commented that line pressures and reporting of pipeline flows could be the source of the usual data. (see his post for more details).
My view is that the pipelines were over pressured (natgas was being stored in the pipes) and this extra storage was 'used up' as the cold weather increased demand. This low pressure will also increase production. Some data errors could have been a contributing factor. Thus, three seemingly unrelated factors combined for a dramatic change in natgas production.
(Note: this is a guess and not much more).

OUCH! OUCH! Natgas Production SKYROCKETS!

Look at the graphs! OUCH! This will lead to 20-30bcf a WEEK increase in injections or a decrease in withdrawals.
OUCH! There is no way the market can have a decent price and have this type of production increase. OUCH!

Updated Charts AND Estimate of shut-in Production.

Recently a major change has occurred in the NatGas Markets. The SPOT price has skyrocketed. Note in the chart below how on Oct 1st, the price JUMPED by a dramatic amount. (click on the graph for the full graph)

This price increase was seen in Canada as well. So the price increase was not regional or specific to a given area, but widespread. WHY?
Demand has come back!
Look at Robry's demand for NatGas from the Residential & Commercial Demand Model. Demand rose from 4-5 bcf a day to 14-15 bcf/day very quickly. This large increase in R&C Demand is very important. For the NatGas market the heating is the biggest use of the commodity. When cold weather hits, demand skyrockets (that is the reason for storage!). When Canada starting getting hit with cold weather and it spread to the Northern Plains, the NatGas demand increased by 10bcf/day.
That 10bcf a day increase in demand is significant for a total demand of 60 bcf day market. This increased usage of NatGas because of colder weather means the gas has somewhere to go. The gloom and doom view of an oversupply of natgas this fall has been 'taken care of' by colder weather. Increase the demand for a product and an oversupply will be corrected- and fast.
10/02/09...5.20....3.11....4.74....8.25..11.57..12.93..13.01..58.80
10/09/09...2.06..13.19..12.81..13.39..16.85..14.89..14.61..97.79
10/16/09...8.82..................................................................18.82i

As a result of the increased demand, all the 'offline' or shut-in production came back. Sure enough in the supply data, the production jumped. This can be seen in the following charts:



But this also gives us an idea of how much gas was shut-in during September. Using some simple estimates, about 32 bcf of gas was shut-in in September. The gloom and doomers will argue that some gas is still shut-in. But the price of natgas in the spot market has shot up and Todd1956 has reported the line pressures have fallen significantly. Both of these would make sense if the demand for Natgas has shot up and shut-in production was restarted.

This is a rare case where all the data from different sources make sense. We had some early cold weather arriving (note Canada counts for cold weather) which increased demand for Natgas. The market responded by increasing the price and producers responded by bringing back shut-in production.

Updated Charts- waiting till winter.

With the shoulders season in full swing and some production curtailed, we have to wait till winter before knowing the true supply situation.

Production declines stabilizing- at least for now.

Very Interesting trends- below 500 bcf/week.

Product Prices gone crazy

Update for Robry's latest data

Nat Gas Supply Continues to Fall

While Value's Drilling rig data is estimated by me for the past couple of weeks, the rigs have slowly increased. But the supply is clearly starting to fall. And fall fast.
If this is a result of shutins, then the supply can rebound. But if this is real cuts in supply, then when winter comes, we may be in real trouble. My guess is that it is 50/50. In other words, some of the supply decrease is real and some shut-ins.

Weekly Graphs.

Updated Graph for Canadian Production

Wow!
Look at that steady fall in production!

Updated Graphs

Updated for Value's latest data

Robry's Supply Numbers Fall to a new Yearly Low

Robry's supply data for last week was the lowest since Feb of 08 (May of 08 had one bad week, but it was an exception). Thus production has fallen to a new low for the year and appears headed down. On the other side, the rig count appears to be headed up. While Value has not posted the data in a while, the rig counts have clearly bottomed.




Note: Both Value and Gasguy have not posted any numbers for this month, so I have estimated the numbers. My estimate is based on other data and is close to their last reported numbers.

Updated Charts

DR/Haiti Trip

Well I am back from 10 days in the Dominican Republic and Haiti with 21 High School youth and 6 other adults.
What a trip!
We worked with a church in the DR and a different church in Haiti
Many of the members of the church in the DR are in the picture below:


We mixed cement for the floor, additional column and floor of the roof. It was all by hand as the next picture shows:


We did a medical clinic and here one of the HS youth is providing first aid:


We also did VBS in both the DR and Haiti:



We played a soccer game in Haiti and some of the people from both sides are in the following pic:


So the youth got to work with the people, like the following Haitian kid:


So the HS youth got to soar to high heights!

Slight uptick in production.

Production YOY is below last year.

In addition, the production levels are showing a clear fall. While some are worried that shut-ins and voluntary cutbacks are the main reason for the decrease, I disagree. While cutbacks do have some impact, decline rates also have an impact. For contractual reasons, a company may overproduce a field for a while (production is higher than optimal geology suggests). When the contract ends, the production returns to a more 'normal' rate. If this view is correct, then the decline in production is far more important and will lead to natgas prices rising.